SERBADK posted a solid set of 1QFY20 results, with earnings growing 19% YoY, thanks to higher activities in both its core O&M and EPCC segments. Current order-book of RM17b has already surpassed previous year-end target of RM15b, with only 45% exposure to oil and gas-related jobs. Maintain OP and TP of RM2.80, given its earnings resilience and growth delivery track record.

Within expectations. SERBADK posted 1QFY20 net profit of RM133.7m, coming in within expectations at 24% and 23% of our and consensus full-year earnings forecasts, respectively. Likewise, the announced dividend of 1.2 sen per share is also within expectations.

Stronger YoY, but slight dip sequentially. YoY, 1QFY20 recorded net profit growth of 19%. Both its largest core segments of operation and maintenance (O&M), and engineering, procurement, construction and commissioning (EPCC) recorded healthy growth as: (i) O&M saw higher maintenance, repair and overhaul (MRO) activities in the Middle East region (e.g. UAE, Qatar, Oman) and Malaysia, while (ii) EPCC saw greater progressions from its chlor-alkali plant in Tanzania and activity with Petronas Carigali. Sequentially, however, net profit dipped slightly by 5% QoQ. This was as (i) O&M activities in some countries, namely Qatar, Turkmenistan and Bahrain, showed significant decrease, while (ii) EPCC saw slower job progression in UAE, Tanzania as well as with Petronas Carigali and Sarawak Shell. We also noted that during the quarter, the company had started to report two additional segments; (i) information, communication and technology (ICT), and (ii) education and training (E&T). This comes as company is increasing efforts in these segments with hopes of broadening its earnings stream, although contributions from these segments are still relatively insignificant currently.

Lowered earnings guidance. Amidst the Covid-19 crisis and the MCO, the company had recently lowered its expected FY20 earnings growth to 10-15%, from previously 15-20%, as some of its projects are facing logistical disruptions. However, despite the difficulties, SERBADK is still displaying strong signs of sustained growth with its superior project execution differentiating it from the competition (e.g. implementing artificial intelligence predictive maintenance and high-end repair capabilities). Additionally, its current order-book of RM17b had already surpassed previous year-end target of RM15b. With only 45% of its order-book derived from oil and gas-related works, coupled with its niche value chain of onshore maintenance, the company is not overly exposed to the low oil price as compared to other sector peers. The company is also gradually working to reduce its earnings dependency on oil and gas-related jobs to 30% in the longer-term.

Maintain OUTPERFORM, with unchanged TP of RM2.80, pegged to 15x PER on FY21E EPS. No changes to our FY20/21E numbers post results (implying earnings growth of 13%/12%), as they are still very well within the earnings guidance range. We continue to like SERBADK given its earnings resilience and growth delivery track record.

Risks to our call include: (i) lower-than-expected order-book replenishment, and (ii) weaker-than-expected margins.

Source: Kenanga Research - 21 May 2020